The Department has heard from you and your members that the request on our audit letters has caused client concern. To respond to this issue I have attached a letter with an explanation of the audit programs for your members and their concerned clients.

The second document is a copy of the revised audit response to inquiry form.  The request for tax preparer information is only if it was not identified on your return, we removed the question about the fee and the entire section was moved to the bottom.

I am hopeful that these documents will help the dedicated professionals that are committed to serving their clients and improving compliance as we continue our efforts to collect the right amount of tax and timely pay accurate refunds.

Please let me know if you have any questions.

Nonie Manion
Executive Deputy Commissioner
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So for example, fraudsters will tend to pack their returns with lots of deductions so as to maximize the refund, sometimes reaching up to 70 percent of annual gross income. If law-abiding taxpayers claim a higher-than-usual amount of deductions as well, their returns might get flagged, as they match a common pattern the NYSDTF has seen from fraudsters. 

“Our objective is to leave the good taxpayers alone. Pay them quickly, get those returns through and only stop those we think have a compliance issue. But we’re always going to end up with some good returns that follow the same pattern as the bad returns because people are looking at what are the patterns of the returns getting paid, and copying that to get through,” she said.  

Other times, a return could get flagged because of where it comes from. Sometimes, she said, the state will write to someone about a potentially fraudulent return coming from that taxpayer’s preparer, only to hear back from them that it wasn’t their preparer who filed that return. This means that both the preparer who had their client information stolen and the preparer the return came from could be compromised.  In such cases, she said, the department flags every return for review coming from either preparer.

“We’re going to have an individual look at every return that comes through that preparer and match it up to the history and other information to see if there’s anything off from it,” she said.

Manion said many preparers are unaware they’ve even been compromised—the NYSDTF determines that it has happened by looking at the patterns surrounding them. She brought up one instance where the department got a return filed under the taxpayer’s name, with correct wages claimed and no business income—just as in prior years. How they found out it was false was that the taxpayer generally had other income from horse races that, this year, was missing. Investigating further, the department found that that preparer, who’d previously had a very good record, had been hacked and the preparer’s information was being used to send out fraudulent returns. 

She conceded that this method will sometimes result in nonfraudulent returns being flagged as well. However, she said that the state needs to address potential identity theft or tax fraud quickly, because if the money is sent out to a fraudster, the NYSDTF is not going to get it back. This is why it needs to sometimes do things like ask for documentation that generally gets sent to the department anyway—for instance, a Form 1098 for real estate taxes.

“We don’t get that 1098 for a year and a half, and we need to look at this refund now, because if it’s bad, we can’t pay it,” she said.

Manion said the department needs to make it easier for law-abiding taxpayers caught up in this system to work with the department in resolving the issue. She noted, however, that the department has about 100 people sending out hundreds of thousands of desk audit letters per year—last year, she said, it sent out 374,000. The vast majority of these letters never get any response, indicating that the department is indeed blocking a lot of fraudulent refunds.

If someone is getting repeatedly flagged under this system, it indicates that something needs to change in the rules the department applies to its filtering system, according to Manion. She said that if this is happening to a client (one member said some of his clients have been audited three years in a row because of this system), then it would be best to let the department know so it can adjust the system. 

“The worst thing that could happen is we write rules into the program that stops your good returns, and you are up in arms. Barring high volume returns with a similar pattern, we will do a small test, we test things out, we fine-tune the rules before we actually incorporate that in the process,” she said. 

Manion pointed out that such measures are necessary because fraudsters are increasingly targeted CPAs because of the valuable personal information they hold. While she said she’d like to go back to the times when people didn’t have to worry about these issues, she can’t. With this in mind, she implored the members to take system security seriously and take advantage of software services that are out there already. 

“That’s really what I need to ask of this group—to really stress securing your system, securing the system you have. We’re working with the software vendors like the Intuits and Lacertes to stress to them that they increase their security. And if they do offer cloud security with enhanced security, you’re better off doing that. This is a personal opinion, but they have to put so much security in it. If you think of your little network in your office, you probably don’t have the same level of security as the major commercial businesses do. So, I mean we need to, everyone needs to, be diligent in securing their information,” she said.